A New Tax Could Send Shoppers Back to the Mall

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Your Internet shopping addiction could soon face a new tax.

The Senate appears ready to ease the restrictions on how states can charge sales tax. Under current federal law, online retailers only collect the tax when they have a physical presence—a store, warehouse or office—inside your state. In a new bill expected on Monday to clear a procedural Senate vote, all online sales would be subject to state sales taxes.

Jack Seibert, a jeweler in Columbus, Ohio, welcomes the possible change. Many a groom has sauntered into his shop, looking for an engagement ring. He taught them all about color, cut, clarity and carat, only to learn that they later bought a diamond online.

Customers treat his store as a "showroom," Seibert told The Fiscal Times. It's the same phenomenon that has crippled big box retailers such as the electronics chain Best Buy. His would-be grooms automatically save $675 in taxes by acquiring a $10,000 diamond on the Internet.

Without a hint of irony, Seibert said, "It puts us between a rock and a hard place."

Advocates say the Marketplace Fairness Act would place brick-and-mortar stores on a level playing field with their online competitors. "Right now, the government gives you a price advantage for purchasing on the Internet," said Rachelle Bernstein, the National Retail Federation's tax counsel vice president.

The bill would also flush an estimated $23 billion into the coffers of cash-strapped states, said Max Behlke, manager of state-federal relations at the National Conference of State Legislatures. Other studies peg new revenues at $11 billion.

But Internet start-ups and aggressive re-sellers on eBay and Amazon could be caught in the bureaucratic nightmare of having to comply with dozens of state tax agencies. That's a concern for opponents of the bill, including anti-tax crusader Grover Norquist and the Tea Party-affiliated FreedomWorks.

Their battle looks to be uphill.

In a show of support for the Marketplace Fairness Act, its chief sponsor Sen. Mike Enzi, R-Wyo., attached the bill as an amendment last month to the budget resolution. The amendment was approved 75 to 24, a largely symbolic vote that led Senate Majority Leader Harry Reid, D-Nev., to fast track the measure.

It essentially fixes a 1992 Supreme Court ruling on mail-order catalogs, an era before Cyber Monday existed and before shoppers could check for prices on their smart phones. In Quill Corp. v. North Dakota, the court established physical presence as the standard for collecting sales tax.

But the bill contains a relatively modest protection for small businesses—exempting those with less than $1 million in revenues. eBay announced Sunday that it wants a stronger protection, more in line with the other standards that Congress has used to define a small business.

For example, Obamacare essentially identifies a small business as having less than 50 employees. Other federal laws rely on the threshold of less than $10 million in revenues. eBay CEO John Donahoe has asked his customers to request that lawmakers amend the bill to conform with those benchmarks.

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Large companies such as Wal-Mart, Best Buy and Amazon already possess the manpower to deal with a slew state sales taxes, meaning that the tax might cement the power of big-time stores that have both stores and a web presence. So while the bill theoretically protects jewelers such as Seibert, it may also erect barriers to entry for Internet upstarts that must compete against the retail establishment.

Supporters claim that the regulatory burden would be minimal, since the bill requires states to simplify their collection process and provide companies with free tax software. The catch is that states could have individual software platforms, instead of a uniform one, which would make automating the tax virtually impossible for most companies.

"The idea that a small business is going to run 25 different software programs to comply with 25 different states, that's not going to work," said Brian Bieron, eBay's senior director of U.S. government relations and global policy.

The $1 million figure was reached somewhat arbitrarily through negotiations between business interest and lawmakers and Capitol Hill staff, according to interviews with the participants. It was about politics, as much as economic analysis.

Earlier versions of the bill put the exemption as low as $500,000. Proponents claim that roughly 43 percent of "e-tailers" will avoid the sales tax by having revenues of less than $1 million, yet the question is balancing the need to fund state governments with the ability to create jobs—something that tends to occur at higher revenue levels.

Some organizations such as the National Council of State Legislatures would have preferred a much lower threshold, since it would maximize their income. Stung by the 2008 financial crisis, state and local governments have slashed their budgets and payrolls, shedding about 600,000 jobs over the past six years, according to the Bureau of Labor Statistics.

But as of now, the $1 million threshold is viewed as enabling Web-based small businesses to compete against other brick-and-mortar stores, instead of the big names.

Enzi spokesman Daniel Patrick Head told The Fiscal Times, "The exemption helps them get off the ground and running so they're on the same footing as their Main Street counterparts."